Chaos theory in practice: in just two days, an innocent joke about Chinese pig inflation has avalanched into an international financial incident which is already costing UBS millions in lost Chinese revenue, and may have cost a top economist his job, with the biggest Swiss bank losing all research credibility in the process.

As a reminder, back on June 12 we first pointed out UBS Chief Economist, Paul Donovan's, comment, which said that Chinese inflation was mainly due to sick pigs which as the UBS economist said only "matters if you are a Chinese pig", and which quickly went viral on Chinese social networks - under the narrative that UBS was referring to Chinese people as "pigs" - and has now escalated into an international diplomatic incident.

"Chinese consumer prices rose. This was mainly due to sick pigs. Does this matter? It matters if you are a Chinese pig" - UBS

Then, one day after we reported that a "Massive Scandal Erupts In China Over "Racist" UBS "Chinese Pig" Comment", the scandal only got worse, as Chinese brokerages in Hong Kong stepped into the furor surrounding comments by Donovan over the “Chinese pig,” with Bloomberg reporting that an industry group urged UBS to fire all people involved in the incident and a rival firm cutting business ties.

What is bizarre is that both UBS and its chief economist had previously apologized (twice in the latter case) for the comment, saying it was “innocently intended.”

“I made a mistake and I unwittingly used hugely culturally insensitive language,” Donovan said in a Bloomberg TV interview with Francine Lacqua on Thursday, reiterating that his remarks were not intended to offend. “I apologize publicly for that.” In addition to Donovan’s apology on television, UBS also expressed its remorse. The bank has had a presence in China longer than most Wall Street firms, and was the first foreign business to receive approval for a majority stake in a local securities venture under the country’s recent financial opening push. Last year its China operations reported a net loss of 65.9 million yuan, according to a company filing.

“We apologize unreservedly for any misunderstanding caused by these innocently intended comments,” UBS said in an emailed statement. “We have removed the audio comment from circulation. To be clear, this comment was about inflation and Chinese consumer prices rising, which was driven by higher prices for pork.”

But this wasn't enough.

The charge against Mr Donovan was led in part by Hao Hong, head of research at Bank of Communications International, the state-run Chinese bank’s Hong Kong unit. Hong called the comments “distasteful and racist language” in a Twitter post. Of course, Hong refused to explain what exactly about Mr Donovan’s comments was racist or offensive when reached by the Financial Times.

Next, the Chinese Securities Association of Hong Kong, a group that represents financial institutions including the Hong Kong branches of mainland companies, demanded dismissals and a further apology. Haitong International Securities Group Ltd. said Friday it had suspended its activities with UBS.

As we reported previously, Donovan's comment sparked outrage on Chinese social media sites with users saying it humiliated Chinese people. At least three public accounts published articles about the report on WeChat, drawing more than 10,000 hits. Screen grabs of the report also circulated on chat groups. Some users posted a link to a UBS web page for filing complaints. State-run Global Times tweeted “UBS chief global economist Paul Donovan used distasteful and racist language to analyze China’s inflation in a recent UBS report.”

#BREAKING UBS chief global economist Paul Donovan used distasteful and racist language to analyze China’s inflation in a recent UBS report, sparking uproar across Chinese social media. Chinese netizens called for an official apology from #UBS. pic.twitter.com/uTMR6wyj02

The outrage accelerated even more on Friday, when the Securities Association of China calls UBS economist Paul Donovan “unwelcome” over his "Chinese pig" comment. SAC also recommended that members should not cite Donovan’s research views or invite him to relevant industry events, and demanded UBS take effective measures to eliminate the “negative impacts,” and improve management and review of research reports to avoid similar incidents or consequences on the group’s normal business operations in China.

In other words, China's lack of humor or grasp of sarcasm means that UBS is effectively non-grata in China until Donovan is fired. And that's precisely what appears to have happened on Friday, because as the FT reports, UBS placed Paul Donovan on leave "after a Chinese financial group suspended business with the Swiss bank because of his remarks about swine fever in China, which drew the ire of a nationalist tabloid and prompted calls by an industry group for his removal."

As noted above, a Haitong spokesman said on Friday that the company had cut ties between its Hong Kong unit and UBS across all business divisions based on “a collective decision made by the senior management”. Shortly after, a UBS spokesman told the Financial Times: “We confirm that we have asked Paul Donovan to take a leave of absence as we review this matter, to evaluate whether further steps need to be taken”.

We hinted first thing this morning that Donovan's chair may be empty today when we pointed out that the traditionally daily morning note from the chief economist was mysteriously missing from inboxes this morning.

As the FT notes, the sudden outpouring of vitriol for the Zurich-based bank comes amid tense trade negotiations between Washington and Beijing and heightened scrutiny of western companies operating in China.

Additionally, UBS’s action shows executives are not taking any chances over imbroglio, which could threaten the foothold it has recently established in China. Last year it received approval to become the first foreign bank in China to take a controlling stake of its local securities joint venture and it has been ranked as the top-performing foreign fund house for the past two years.

But the overarching bizarro irony in this entire incident is just how ridiculous it all is - a simple read of Donovan's comment by any native English speaker reveals it was not meant to slur Chinese citizens, if anything it was an expression of Donovan's quirky, deadpan humor which in the past has slammed non-economists, traders, bitcoin enthusiasts and virtually every other group. But it was the Chinese that expressed a supreme lack of humor, that finally took Donovan down over his comments.

Stephen Matthews, a linguistics professor at the University of Hong Kong, said: “The perceived insult is derived either from a misreading of the English text by a non-native speaker, or from a poor Chinese translation. Either way, the author is not at fault.”

Alas, Hong’s interpretation was quickly picked up by the Global Times, a state-run Chinese tabloid, which said on Thursday in a Twitter post that the comments had “sparked an uproar across Chinese social media”.

And then things really just went out of control, and despite repeated apologies by both UBS and Donovan for the comments, which were also pulled from UBS’s website, the controversy continued to snowball

And now the outcry on the other side is starting, with FT financial reports pointing out the correct implications from this entire incident, namely that it wasn't Donovan's fault, but UBS' for throwing its own economist under the bus, and in the process crushing any credibility its Chinese research may have going forward.

This actually reflects as badly on @UBS as it does China. I get the importance of their business there, but it basically kills any research credibility they have there, if they'd throw him under the bus so readily. https://t.co/a7EfmALAcd

Which is precisely what we said yesterday: "Whether UBS will soon be declared non-grata in China remains to be seen, but one thing is certain: any strategist or economist writing about China, whether it is about its expensive pigs, or the fact that its financial system hangs by a thread and the country is one uncontrolled bank run away from a social revolt, will twink twice before hitting save."

As for Paul Donovan being the first job casualty over a comment regarding "Chinese Pigs", our sincerest condolences.